Note L Income Taxes

The benefit for income taxes is as follows:


	Year Ended December 31
	2013			2012			2011
	(In thousands)
Current
Federal	$	160		$	0		$	0
State		7			7			10
Deferred
Federal		(30,540	)		0			0
State		(10,012	)		(7	)		(10	)

	$	(40,385	)	$	0		$	0

The difference between the total expected tax benefit (computed by applying the U.S. Federal tax rate of 35% to pretax income in 2013, 2012 and 2011) and the reported income tax benefit relating to loss before income taxes is as follows:


	Year Ended December 31
	2013			2012			2011
	(In thousands)
Tax rate applied to income (loss) before income taxes	$	4,061		$	(249	)	$	2,333
Increase (decrease) resulting from the effects of:
Tax exempt interest on obligations of states and political subdivisions		(148	)		(118	)		(143	)
State income taxes		(259	)		(27	)		(173	)
Stock compensation		4			28			132
Expiration of capital loss carryforward		0			354			0
Other		38			53			281

Federal tax provision before valuation allowance		3,696			41			2,430
State tax provision before valuation allowance		740			76			494

Total income tax provision		4,436			117			2,924
Change in valuation allowance		(44,821	)		(117	)		(2,924	)

Income tax provision (benefit)	$	(40,385	)	$	0		$	0

The net deferred tax assets (liabilities) are comprised of the following:


	December 31
	2013			2012
	(In thousands)
Allowance for loan losses	$	8,139		$	8,964
Other real estate owned		899			1,521
Capital losses		0			26
Accrued stock compensation		528			492
Federal tax loss carryforward		42,776			44,755
State tax loss carryforward		7,925			8,202
Alternative minimum tax carryforward		1,304			1,304
Net unrealized securities losses		6,503			0
Deferred compensation		1,169			1,162
Other		273			990

Gross deferred tax assets		69,516			67,416
Less: Valuation allowance		0			(44,821	)

Deferred tax assets net of valuation allowance		69,516			22,595
Depreciation		(1,365	)		(1,514	)
Deposit base intangible		(233	)		(538	)
Net unrealized securities gains		0			(1,972	)
Accrued interest and fee income		(1,060	)		(620	)

Gross deferred tax liabilities		(2,658	)		(4,644	)

Net deferred tax assets	$	66,858		$	17,951

At December 31, 2013, the Company’s deferred tax assets of $66.9 million consists of approximately $52.6 million of net U.S. federal deferred tas assets and $14.3 million of net state deferred tax assets.

Management assesses the valuation allowance recorded against deferred tax assets at each reporting period. The determination of whether a valuation allowance for net deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence. During 2008, the Company established a valuation allowance for its net deferred tax assets, primarily due to the realization of significant losses, significant credit deterioration, negative trending in asset quality and uncertainty regarding the amount of future taxable income that the Company could forecast. At December 31, 2012, based on the assessment of all the positive and negative evidence, management concluded that there was not sufficient evidence to conclude that it was more likely than not that the Company would realize the benefits associated with its net deferred tax assets; accordingly, the Company continued to maintain a valuation allowance of $44.8 million for the net deferred tax assets.

At September 30, 2013, the Company is no longer in a three-year cumulative loss position, which represented significant negative evidence. Therefore, based on the assessment of all the positive and other negative evidence, management concluded that it was more likely than not that its net deferred tax assets of $66.9 million will be realized based upon future taxable income, and therefore reversed the valuation allowance.

The deferred tax asset valuation allowance was reversed after the achievement of operating results for the third quarter and nine months of 2013 which demonstrated the continuation of increasing income before taxes results marking the fifth consecutive quarter of profitable operating results. This supports a steady state annual income before taxes of $13 to $16 million. The fourth quarter of 2013 results also provided further validation of the positive credit quality trending improvements marking the sixteenth consecutive quarter of such improvements. At December 31, 2013, the classified asset ratio as a percentage of Tier 1 Capital and the allowance for loan losses improved to 23.0 percent compared to 54.1 percent at December 31, 2008.

In addition, the achievement of operating results for the third and fourth quarters and full year of 2013 consistent with management’s forecast for these periods, provided further evidence of the Company’s ability to produce reliable forecasts, and strengthened the weight of the positive evidence provided by forecasted future taxable income. The Company’s forecast of taxable income at December 31, 2013 demonstrates that there will be sufficient future taxable income to realize the $66.9 million net deferred tax asset at December 31, 2013. The positive evidence related to the forecasted future taxable income assists in overcoming the weight of the negative evidence related to the significant operating losses recognized as a result of the recent financial crisis and adds to the overall weight of positive evidence that the December 31, 2013 deferred tax asset is more likely than not realizable. Prior to the third quarter of 2013, the Company was unable to conclude that there was sufficient evidence to support that the deferred tax asset was more likely than not realizable and to support the reversal of the deferred tax asset valuation allowance.

The positive evidence at December 31, 2013 included: (1) the Company’s significantly improved credit risk profile, (2) continued improving trends in credit quality, (3) continued profitability in recent quarters, (4) policy enhancements which reduce exposure to credit risk through concentration limits by loan type, exposure limits to single borrowers, among others, (5) record of long-term positive earnings prior to the recent economic downturn, (6) strong capital position, as well as, (7) sufficient amounts of estimated future taxable income, of the appropriate character, to support the realization of the Company’s net deferred tax asset at September 30, 2013. Management’s confidence in the realization of projected future taxable income is based on an analysis of the Company’s risk profile and recent trends in financial performance, including credit quality trends. In determining whether management’s projections of future taxable income are reliable, management considered objective evidence supporting the forecast assumptions as well as recent experience which demonstrates the Company’s ability to reasonably project future results of operations. The analysis showed that credit losses will be at pre-crisis levels and will continue to trend downward, and that credit quality indicators will continue to improve. Further, while the banking environment is expected to remain challenging due to economic and other uncertainties, the Company believes that it can confidently forecast future taxable income at sufficient levels over the future period of time that the Company has available to realize its net deferred tax asset, which is discussed further below.

Management expects to realize the $66.9 million in net deferred tax assets well in advance of the statutory carryforward period. At December 31, 2013, approximately $14.9 million of existing deferred tax assets are not related to net operating losses or credits and therefore, have no expiration date. Approximately $42.8 million of the remaining deferred tax assets relate to federal net operating losses which will expire in annual installments beginning in 2029 through 2032. Additionally, approximately $7.9 million of the deferred tax assets relate to state net operating losses which will expire in annual installments beginning in 2027 through 2032. Tax credit carryforwards at December 31, 2013 include federal alternative minimum tax credits totaling $1.3 million which have an unlimited carryforward period.

A valuation allowance could be required in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at December 31, 2013 that it is more likely than not that the net deferred tax assets of $66.9 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal projections which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, a valuation allowance may need to be recorded for some or all of the Company’s deferred tax asset. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company’s financial condition and results of operations.

The Company recognizes interest and penalties, as appropriate, as part of the provisioning for income taxes. No interest or penalties were accrued at December 31, 2013.

The Company has no unrecognized income tax benefits or provisions due to uncertain income tax positions. The Internal Revenue Service (IRS) examined the federal income tax returns for the years 2006, 2007, 2008 and 2009. The IRS did not propose any adjustments related to this examination. The following are the major tax jurisdictions in which the Company operates and the earliest tax year subject to examination:


Jurisdiction	Tax Year
United States of America		2010
Florida		2008

Income taxes related to securities transactions were $162,000, $2,939,000 and $471,000 in 2013, 2012 and 2011, respectively.